RPT-Fitch: Turkish NBFI Law - Limited Reform, But Changes On The Way
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May 6 (Reuters) - (The following statement was released by the rating agency)
Turkey's non-bank financial institutions (NBFI) law has triggered limited reform and innovation among leasing, factoring and finance companies since coming into force at the start of 2013, Fitch Ratings says. But we expect growth in the sale-and-leaseback (SLB) market and consolidation among factoring companies over the next 18 months.
Demand for SLB transactions, which the law permitted for the first time in Turkey, is from companies seeking to refinance head offices and other premises, and unlock the value of real estate assets. We believe the market is set for growth as companies strive to achieve leaner balance sheets, improve financial ratios, refinance short-term debt and optimise financial flexibility. Firms can also benefit from tax advantages because fixed assets are valued at market rates without triggering capital gains tax payments at the point of entering into a SLB transaction.
But SLB deals heighten risks for leasing companies. They increase concentration as transaction sizes are often large and maturities are long, up to six years.
The new law is also likely to drive consolidation in the financing sector, although this has been limited to date. Mergers, acquisitions and even liquidations are likely as firms act to meet the requirement to have minimum paid-in capital of TRY20m by end-2015.
Factoring companies are likely to undergo more dramatic changes than leasing firms. The 31 leasing companies are dominated by bank-owned subsidiaries, where capital is likely to be provided as required, and some larger independent companies that already comply with future minimum capital levels. In contrast, we estimate that up to 50 of around 80 factoring companies, excluding bank-owned subsidiaries, do not yet comply with the upcoming requirements. Of these, around 35 would still fall short even after converting retained earnings to capital. Nevertheless, there has been little visible change in the NBFI market so far. Operating leases, also newly permitted, have not taken off. These represented an insignificant (less than 1%) proportion of total outstanding leases at end-2013.
We expect limited growth for operating leases because barriers to entry are high. Challenges for newcomers include lack of specialist knowledge, competition from established vehicle fleet-management companies and the absence of liquid secondary markets across a broad range of asset classes other than vehicles, making recovery values difficult to assess. Accounting practices differ between finance and operating leasing activities, which distorts the figures investors analyse.
But there have been some improvements in transparency, even though delays in establishing a central invoice registrar means it is now expected to begin operations only in 3Q14. The NBFI Association is up and running. Conferences, publications and data for NBFIs appear to be gathering pace. Improved transparency could benefit bond issuance as local investors increasingly require additional disclosure.
Fitch rates 10 NBFIs in Turkey. Growth opportunities for Turkish NBFIs remain strong as demand for finance is highly correlated with GDP, which we forecast to grow at 2.5% for this year and 3.2% for 2015.